Unusual Volatility

January 25, 2022

This won’t be a long post, but perhaps it’s importance will be obvious in the near future. In a similar fashion it doesn’t hold answers, but simple questions about what in the world is going on.

Volatility is highly, highly unusual. If you watched the intraday action for the markets over the past two weeks it would be reasonable to look at what has happened and accept that perhaps the market was just too high. It is a theme this blog has been on for a while.

During the run up, the relentless pressure on the upside caught my attention (and more than a few of my dollars). On the downside similarly interesting things are happening.

Here is a chart of the S&P500 since January 13th. If you look closely, the action appears to show dip buyers coming into the market and then getting slammed back down again. This was particularly noticeable on January 24th and January 25th. Analysis by others suggest that this recovery (about 4% on Monday, and 2.5% on Tuesday) has never happened before. At the end of the day yesterday (Tuesday, January 25th), the market succumbed to the selling by the close of trading, suggesting even the dip buyers are starting to change their habits.

S&P 500 – January 13th-January 25th – 15 minute Candlesticks

This volatility is unusual, and even more noticeable because there has been consistent and prolonged buying as the market rose over the past two years. These are unusual signals.

While there is a great deal about market psychology that can be inferred from all of these signals, the root cause is likely to be a result of too much capital in the system and a ‘Fed Put’ underlying the market. Additionally, but anecdotally, there are a lot of people who were left with spare time and spare cash during the COVID work from home period who are now returning to a normal routine. They may spend less time focusing on trading.

If any of this is true, then the probabilities are for markets to ‘settle’. If this settling of volatility causes a reversal, it is highly likely that markets will go down further in the future.

What is clear is that the Federal Reserve, likely as early as today, will inform the market that rates will be increasing. This is expected. The Federal Reserve has already informed the market that they will begin removing money from the system by stopping or reversing their quantitative easing program. Finally, there is plenty of evidence that the ‘meme’ stock crowd has moved on to other things (note the decline in prices for stocks like AMC Theatres and GameStop).

While it is always an error to assume too much about market activity, a lot of this also looks like ‘painting the tape’ which is an old term for creating market activity to make participants feel comfortable. This is akin to a boiler room control over penny stocks to make it look like there is demand, that isn’t actually there. It can work for a while, but sooner or later, it peters out and then no one is left to buy.

This isn’t to say that prices will come down today, or even in the next few weeks, but this unusual trading is a result of ‘unusual’ conditions which typically don’t persist for enduring periods of time, so be prepared for a return to normal. The prices will almost certainly reflect that in the coming weeks and months, and it is best to plan accordingly.


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